F

ITC Ltd BUY

I
C.M.P: Target Price:
Rs.279.55 Rs.321.00
June 10, 2010 R
1 Year Comparative Graph SYNOPSIS S
• ITC is one of India's foremost private sector
companies with a market capitalization of T
nearly US $ 19 billion and a turnover of
over US $ 5.1 Billion. C
• Non-cigarette FMCG segment registers
ITC Ltd BSE SENSEX robust revenue growth of 34% in Q4.
A
• Paper and Pulp investments leveraged to
Stock Data improve value capture and margins.
L
Sector FMCG
Segment results grow by 35%.
Face Value Rs. 1.00 L
• Sequential improvement in Hotels business
52 wk. High/Low (Rs.) 292.45/187.20
revenues and profits, with growth of 16%
Volume (2 wk. Avg.) 466000
and 10% respectively in Q4, reversing the
BSE Code 500875
Market Cap (Rs.In mn) 1067377.81 de-growth of the first 3 Quarters of the year. R
• The ‘ITC Royal Gardenia’ was launched in
Share Holding Pattern
Bengaluru. It is the world’s largest and E
Asia’s first LEED Platinum rated hotel.
• Net Sales and PAT of the company are S
expected to grow at a CAGR of 14% and
20% over 2009 to 2012E respectively. E
A
Financials
V.S.R. Sastry
(Rs.in.mn) FY10 FY11E FY12E R
Equity Research Desk Net Sales 183822.4 205881.0 230586.8
vsrsastry@firstcallindiaequity.com EBIDTA 66773.8 76176.0 86157.1 C
Dr. V.V.L.N. Sastry Ph.D. PAT 40610.0 47054.3 53592.2
Chief Research Officer 10.64 12.32 14.04
drsastry@firstcallindia.com
EPS
H
P/E 26.28 22.68 19.92

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Peer Group Comparison

Market
Name of the company CMP(Rs.) Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

ITC Ltd 279.55 1067377.81 10.64 26.27 6.01 370.00

Marico Ltd 113.5 69281.9 3.86 29.40 18.82 65.50

HUL 250.55 546512.5 10.09 24.83 12.82 750.00

Dabur Ltd 192.95 167400.7 4.77 40.45 14.52 175.00

Investment Rationale

Q4 FY10 Results Update

ITC, largest private sector Cigarette Company with a diversified portfolio reported
results for the quarter ended March 31, 2010. The company has posted an
increase of 27.10% in the net profit after tax which stood at Rs 10.282.20 million
for the quarter ended March 31, 2010 as compared to Rs 8089.90 million for the
quarter ended March 31, 2009, which is driven by handsome growth in non-
cigarette FMCG, Agri and Paperboard and Packaging businesses.

Total income has increased 30.43% from Rs 39796.60 million for the quarter ended
March 31, 2009 to Rs 51908.10 million for the quarter ended March 31, 2010,
while its net sales stood at Rs 51316.10 million, registering growth of 30.66% as
against same quarter in the previous year. It reported earnings of Rs 2.69 a share
registering a growth of 25.64%.

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 Quarterly Results - standalone (Rs in mn)

As At Mar-10 Mar-09 %change

Net sales 51316.10 39274.10 30.66

PAT 10282.20 8089.90 27.10

Basic EPS 2.69 2.14 25.64

Break up of Expenditure

Segment wise Revenue

Revenue Streams 4Q FY 2010 4Q FY 2009

FMCG 35756.5 28483.4
Agri Business 9880.9 5258.9
paperboards 8029.9 7136.3
Hotel 2562.1 2210.3
Total 56229.4 43088.9

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Segment-wise Performance for the Q4 FY10

Cigarette business

ITC’s Cigarette Division, for the quarter, registered 21.6% yoy growth in Net
Revenues on the back of robust volume growth and better realization (price hikes).

Non-cigarette FMCG business

ITC’s Non-Cigarette FMCG business registered a strong uptick in revenue growth to

34% yoy to Rs1,125cr (Rs834cr) driven by impressive performance from its
Branded packaged foods business and Stationery business.

Hotel business

ITC’s Hotel business registered modest growth during the quarter of 16% yoy to
Rs256cr (Rs221cr). Hotel segment fared well on back of economic revival leading to
higher occupancies and room rentals.

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 Paperboard and Packaging business

The segment registered a modest growth in Revenue of 13% yoy to Rs803cr from
Rs.713cr as compare to same quarter previous year.

Agri‐‐business

ITC’s Agri Business registered a strong 88% yoy growth in revenues to Rs988cr
(Rs526cr), partially aided by low base, driven by the continuing strong performance
of the leaf tobacco portfolio. The business maintained its position as the foremost
exporter of leaf tobacco, leveraging the growing demand for Indian tobaccos.

Plans to hike capital

ITC Ltd has considered Increasing Authorised Share Capital of the Company and
board is planning to consider Bonus issue on 18th June.

Recommended dividend

ITC Ltd has recommended a special Centenary dividend of Re. 5.50 per Ordinary
Share of Re 1/- each and a dividend of Re. 4.50 per Ordinary Share for the financial
year ended March 31, 2010.

Increase of share capital for ESOS

ITC Ltd has recommended a fresh limit of 5% of the Share Capital of the Company to
be earmarked for issue of shares from time to time under a new Employee Stock
Option Scheme.

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Allotment of shares

ITC Ltd has issued and allotted 28,51,820 Ordinary Shares of Re. 1/- each, upon
exercise of 2,85,182 Options by Optioned under the Company's Employee Stock
Option Schemes.

Consequently, with effect from March 19, 2010, the Issued and Subscribed Share
Capital of the Company stands increased to Rs. 381,81,76,790/- divided into
381,81,76,790 Ordinary Shares of Re. 1/- each.

Company Profile

ITC is one of India's foremost private sector companies with a market capitalization of
nearly US $ 19 billion and a turnover of over US $ 5.1 Billion. ITC is rated among the
World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable Companies
by Forbes magazine, among India's Most Respected Companies by Business World and
among India's Most Valuable Companies by Business Today.

ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is

one of the country's biggest foreign exchange earners (US $ 3.2 billion in the last
decade). The Company's 'e-Choupal' initiative is enabling Indian agriculture significantly
enhance its competitiveness by empowering Indian farmers through the power of the
Internet. This transformational strategy, which has already become the subject matter
of a case study at Harvard Business School, is expected to progressively create for ITC a
huge rural distribution infrastructure, significantly enhancing the Company's marketing
reach.

ITC's wholly owned Information Technology subsidiary, ITC Infotech India Limited, is
aggressively pursuing emerging opportunities in providing end-to-end IT solutions,
including e-enabled services and business process outsourcing. ITC's production
facilities and hotels have won numerous national and international awards for quality,
productivity, safety and environment management systems. ITC was the first company

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in India to voluntarily seek a corporate governance rating. ITC employs over 25,000
people at more than 60 locations across India.

Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY09 FY10 FY11E FY12E

Description 12m 12m 12m 12m

Net Sales 155827.30 183822.40 205881.09 230586.82

Other Income 3403.10 3743.30 4117.63 4529.39

Total Income 159230.40 187565.70 209998.72 235116.21

Expenditure -105295.70 -120791.90 -133822.71 -148959.08

Operating Profit 53934.70 66773.80 76176.01 86157.13

Interest -183.20 -533.60 -586.96 -633.92

Gross profit 53751.50 66240.20 75589.05 85523.21

Deprecation -5494.10 -6087.10 -6391.46 -6711.03

Profit Before Tax 48257.40 60153.10 69197.60 78812.18

Tax -15621.50 -19543.10 -22143.23 -25219.90

Profit After Tax 32635.90 40610.00 47054.37 53592.28

Equity capital 3774.40 3818.20 3818.20 3818.20

Reserves 133025.50 136281.70 183336.07 236928.35

Face value (Rs.) 1.00 1.00 1.00 1.00

EPS 8.65 10.64 12.32 14.04

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Sep-09 31-Dec-09 31-Mar-10 30-Jun-10E

Description 3m 3m 3m 3m

Nets ales 43452.80 45801.50 51316.10 53881.91

Other income 684.40 1591.20 592.00 651.20

Total Income 44137.20 47392.70 51908.10 54533.11

Expenditure -27551.60 -28725.10 -35136.50 -35831.47

Operating profit 16585.60 18667.60 16771.60 18701.64

Interest -181.40 -108.70 -185.10 -166.59

Gross profit 16404.20 18558.90 16586.50 18535.05

Deprecation -1483.90 -1548.70 -1538.60 -1569.37

Profit Before Tax 14920.30 17010.20 15047.90 16965.68

Tax -4821.20 -5568.50 -4765.70 -5429.02

Profit After Tax 10099.10 11441.70 10282.20 11536.66

Equity capital 3780.20 3795.30 3818.20 3818.20

Face value (Rs.) 1.00 1.00 1.00 1.00

EPS 2.67 3.01 2.69 3.02

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Key Ratios

Particulars FY09 FY10 FY11E FY12E

No. of Shares(In Million) 3774.4 3818.2 3818.2 3818.2

EBITDA Margin (%) 34.61% 36.33% 37.00% 37.36%

PBT Margin (%) 30.97% 32.72% 33.61% 34.18%

PAT Margin (%) 20.94% 22.09% 22.86% 23.24%

P/E Ratio (x) 32.33 26.28 22.68 19.92

ROE (%) 23.86% 28.99% 25.14% 22.26%

ROCE (%) 42.89% 51.32% 43.66% 38.25%

Debt Equity Ratio 0.01 0.01 0.01 0.01

EV/EBITDA (x) 19.56 15.98 14.01 12.39

Book Value (Rs.) 36.24 36.69 49.02 63.05

P/BV 7.71 7.62 5.7 4.43

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Charts:

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Outlook and Conclusion

At the current market price of Rs.279.55, the stock is trading at 22.68 x FY11E
and 19.92 x FY12E respectively.
We estimates earnings for FY11E is Rs.12.32 and FY12E is Rs.14.04 for each
share.
The top line growth of 14% and net earnings growth of 20% for FY09-12.
Price hikes in cigarette, better profitability in FMCG division, robust growth of
agri business and hotel business of the company is expected to give a major
boost to the earnings of the company on the back of events like Common
Wealth Games in 2010 & Cricket World Cup in 2011, so we recommend ‘BUY’
in this particular scrip with a target price of Rs.321.00 for Medium to Long term
investment.

Industry Overview
FMCG sector:

Fast Moving Consumer Goods (FMCG) goods are popularly named as consumer
packaged goods. Items in this category include all consumables (other than
groceries/pulses) people buy at regular intervals. The most common in the list
are toilet soaps, detergents, shampoos, toothpaste, shaving products, shoe
polish, packaged foodstuff and household accessories and extends to certain
electronic goods. These items are meant for daily of frequent consumption and
have a high return.

A major portion of the monthly budget of each household is reserved for FMCG
products. The volume of money circulated in the economy against FMCG
products is very high, as the number of products the consumer use is very
high. Competition in the FMCG sector is very high resulting in high pressure on
margins

FMCG companies maintain intense distribution network. Companies spend a
large portion of their budget on maintaining distribution networks. New
entrants who wish to bring their products in the national level need to invest
huge sums of money on promoting brands. Manufacturing can be outsourced.

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 A recent phenomenon in the sector was entry of multinationals and cheaper
imports. Also the market is more pressurized with presence of local players in
rural areas and state brands

Scope of the Sector

The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest
sector in the economy. A well-established distribution network, intense competition
between the organized and unorganized segments characterizes the sector. FMCG
Sector is expected to grow by over 60% by 2010. That will translate into an annual
growth of 10% over a 5-year period. It has been estimated that FMCG sector will
rise from around Rs 56,500 crores in 2005 to Rs 92,100 crores in 2010. Hair care,
household care, male grooming, female hygiene, and the chocolates and
confectionery categories are estimated to be the fastest growing segments, says an
HSBC report. Though the sector witnessed a slower growth in 2002-2004, it has
been able to make a fine recovery since then.

Growth Prospects

With the presence of 12.2% of the world population in the villages of India, the
Indian rural FMCG market is something no one can overlook. Increased focus
on farm sector will boost rural incomes, hence providing better growth
prospects to the FMCG companies. Better infrastructure facilities will improve
their supply chain. FMCG sector is also likely to benefit from growing demand
in the market. Because of the low per capita consumption for almost all the
products in the country, FMCG companies have immense possibilities for
growth. And if the companies are able to change the mindset of the consumers,
i.e. if they are able to take the consumers to branded products and offer new
generation products, they would be able to generate higher growth in the near
future. It is expected that the rural income will rise in 2007, boosting
purchasing power in the countryside.

However, the demand in urban areas would be the key growth driver over the
long term. Also, increase in the urban population, along with increase in

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 income levels and the availability of new categories, would help the urban areas
maintain their position in terms of consumption. At present, urban India
accounts for 66% of total FMCG consumption, with rural India accounting for
the remaining 34%. However, rural India accounts for more than 40%
consumption in major FMCG categories such as personal care, fabric care, and
hot beverages. In urban areas, home and personal care category, including skin
care, household care and feminine hygiene, will keep growing at relatively
attractive rates. Within the foods segment, it is estimated that processed foods,
bakery, and dairy are long-term growth categories in both rural and urban
areas

Indian Competitiveness and Comparison with the World Markets

The following factors make India a competitive player in FMCG sector:

• Availability of raw materials

Because of the diverse agro-climatic conditions in India, there is a large raw material
base suitable for food processing industries. India is the largest producer of
livestock, milk, sugarcane, coconut, spices and cashew and is the second largest
producer of rice, wheat and fruits &vegetables. India also produces caustic soda and
soda ash, which are required for the production of soaps and detergents. The
availability of these raw materials gives India the location advantage.

________________ ____ _________________________

Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

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